How to calculate your hourly rate

One of the keys to pricing what you do is making sure you cover your costs. Unless you are producing a loss leading product to get people to try you out, then there is absolutely no point selling something that is costing you more to make than you can sell it for. It is a guaranteed way to go out of business.

Some parts of the product or service you sell are easier to include in the cost than others. If you are selling an ebook you can easily work out the paypal charges that you are going to have to pay for each book you sell. If you are selling a physical product then working out the pieces you need to make it is often not too difficult.

Where I do see people struggle is including overheads and their time. Overheads can include things like web hosting, subscriptions to photoshop, advertising etc. Basically anything that you need to run your business that isn’t directly related to the product or service you are selling. These often get forgotten about in working out the cost to create but if you don’t cover them with your sales then you are going to quickly be in the red.

I am working on a post on how to include these items in your costs but today I wanted to have a look at the cost of your time. If you are selling a service then you may be charging your time on an hourly basis but even if you are selling fixed price packages, you still need to work out roughly how much that package costs you to do.

The problem with an hourly rate is that you need to factor in the cost when you aren’t doing chargeable work. The likelihood that you are going to be charging clients for 100% of your time is pretty much zip. Even if you have assistants doing admin work in the background you are still going to need to supervise their work. Then there is time spent creating blog posts, organising social media or perhaps doing free introductory sessions. None of which you will charge for.

The way I like to handle this is to work out how much you want to earn per year and then work back from that to get your hourly rate, taking into account how many chargeable hours you are going to be doing. But to make life even simpler there are loads of calculators out there to help you do this. I like this one from the New Zealand Ministry of Business, Innovation and Employment. It perhaps lacks a bit of granularity in that you can’t do less an hour of non-chargeable work a day but to be honest, I think that it is probably not a bad idea to overestimate non chargeable hours rather than under at least while you get a better sense of the flow of your business.

Rather than explain how I suggest you use the calculator, I have recorded a video to walk you through using it. And if you have any questions, drop me an email.

This calculator gives you the minimum you need to charge to make the income you want to make with the workload you expect to have. You still need to also apply a sense check to the rate it spits out. Does it look to low? Then charge more! Does it look too high? Then you are going to need to reconsider your assumptions. Are your income expectations unreasonable for the type of work you are doing? Or are you going to need to work more hours to make the income you want to make? Or are you just lacking the confidence to charge what you are worth?

If you are charging by the hour then this is the minimum rate you should be quoting. But charging by the hour is often hard to sell. I know it is something that (for the most part) I want to move way from in my business and that I need to more clearly explain what people are getting for the hour they pay for (it is a bit like the web designer who never gets time to beautify their own site). Not only do clients get an hour of my time but I spend time preparing for the interview, doing follow up work and creating solutions but it is hard to capture that when you present an hourly rate. I have been working on packages that more clearly explain this and what the outcome of spending time with me is. Have you packaged your services? Did the change improve your sales?

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